SNB Threat of Negative Rates Seen Unlikely on House Boom

Swiss National Bank President
President Thomas Jordan is unlikely to make good on his threat
of negative interest rates for now so as not to fuel the booming
housing market, economists said.

Jordan said last month a shift in its ceiling on the franc
or a negative rate on commercial banks’ excess deposits was in
the SNB’s toolkit. That comment, made the same month that
European Central Bank President Mario Draghi dangled a similar
threat, prompted the franc to drop to below 1.26 per euro, the
lowest in two years.

Still, the SNB, which already has rates at zero and a cap
on the franc at 1.20 per euro, is limited in its actions as
Switzerland faces the biggest housing boom in two decades,
fueled by the central bank’s loose monetary policy.

“You’ve got the problem that the real estate market is
tending towards overheating,” said Daniel Hartmann, an
economist at Bantleon Bank AG in Zug. “If you did something
more expansive -- like shifting the cap or using negative rates
-- the fear would be you’d be making it worse.”

The SNB will leave its target for the three-month franc
Libor at zero when it holds its next monetary policy review on
June 20, according to all 21 economists in a Bloomberg News
survey. It also will maintain the franc ceiling, the economists
said.

Franc Declines

“As long as the franc per euro is above the 1.20 lower
limit, the SNB wouldn’t introduce negative rates,” said of Ralf Wiedenmann, an economist at Vontobel Asset Management AG.

The SNB started the ceiling on the franc in September 2011,
after investors pushed it toward parity with the euro as they
sought safe assets during the fiscal-debt crisis. The franc
traded at 1.2320 per euro at 12:23 a.m. in Zurich, a decline of
2 percent this year. Against the dollar it traded at 92.37
centimes.

European stocks rose today, rebounding from their longest
streak of weekly losses in 14 months, as investors awaited this
week’s Federal Reserve meeting for signs on the pace of stimulus
reduction. The Stoxx Europe 600 Index rose 1.2 percent to
294.68.

In selling francs in reaction to Jordan’s comments on the
SNB’s tool kit last month, traders got “way ahead of themselves
by speculating that the SNB will act with some new measure,”
said Peter Rosenstreich, chief foreign exchange analyst at
Swissquote in Geneva.

Danish Model

In what might be a model for the SNB to control its
currency, Denmark cut the rate on its seven-day certificates of
deposit to minus 0.2 percent last July after record
interventions failed to stem the krone’s appreciation against
the euro. The Danish central bank, whose mandate is to maintain
a peg against the euro, raised the rate in January to minus 0.1
percent as the currency weakened.

Thanks to the SNB’s loose policy, the Swiss economy has
grown steadily and its real-estate market is in the midst of its
biggest expansion in two decades. The central bank has sounded
the alarm on unsustainable home borrowing and is trying to
prevent a repeat of the property market crisis in the 1990s,
which led to the closing of a bank and hobbled growth for years.

In an effort to protect banks from a housing crash, the
Swiss government in February, following a proposal by the SNB,
introduced new capital rules as of Sept. 30. From that date,
lenders are required to hold an extra 1 percent of risk-weighted
assets linked to domestic residential mortgages.

Booming Market

Some economists say that by creating a disincentive to hold
cash, enacting negative rates would probably just fuel the
already booming Swiss property market.

“Negative interest rates would possibly even increase
tailwind for the housing boom,” said Alexander Koch, an
economist at UniCredit Group in Munich, who doesn’t think the
SNB will change its rates at this week’s meeting. Michael Saunders at Citigroup Inc. in London agrees.

Switzerland’s “economy is already growing steadily and
extra stimulus might well further fuel the pick-up in the
mortgage and real-estate markets,” he said.

This view is echoed by banking executives, with HSBC
Holding Ltd Chairman Douglas Flint saying at a panel at
Switzerland’s St. Gallen University on negative rates last month
that “I think you’d have a massive asset bubble problem.”

Economic growth in Switzerland has proved resilient. Growth
of 0.6 percent in the first quarter beat expectations, and
proved a faster rate than in Germany, Switzerland’s biggest
trading partner and Europe’s biggest economy.

No ‘Emergency’

According to its March forecast, which it will update at
this week’s meeting, the SNB expects growth of 1 percent to 1.5
percent this year.

Swiss consumer prices, on the other hand, have kept falling
in Switzerland. They were down for their 20th-month running in
May. The SNB’s mandate is one of price stability, meaning it
aims to keep inflation positive though below 2 percent. Consumer
prices are expected to contract 0.2 percent this year, before
rising 0.2 percent in 2014, according to the SNB’s March
forecast.

“The situation in the euro area is stabilizing, there are
even signs of an improvement,” said David Marmet, an economist
at Zuercher Kantonalbank. “The Swiss economy is looking pretty
good in comparison to other European countries, so that doesn’t
speak for emergency measures.”

Euro-Area Exports

European Central Bank President Mario Draghi said on June 6
the euro-area economy will return to growth by the end of the
year, handing policy makers in the 17-nation currency bloc a
reason to hold back on fresh stimulus. Just a month before,
Draghi had left investors to ponder a menu of further measures,
including negative rates, that the ECB might consider to aid
growth.

Euro-area exports decrease in April for the first time in
four months, declining a seasonally adjusted 0.8 percent from
March, the EU’s statistics office in Luxembourg said today.
Nominal hourly labor costs in the euro area rose 1.6 percent in
the first quarter from the year-earlier period, a separate
report showed today. In Germany, labor costs were up 3.9
percent, with wages rising 3.5 percent.

In Asia, Singapore’s exports fell more than economists
estimated in May as manufacturers shipped fewer electronics.
Non-oil domestic exports slid 4.6 percent from a year
earlier, after falling 1 percent in April, the trade promotion
agency said. The median of 10 estimates in a Bloomberg News
survey was for a 0.2 percent drop.

U.S. Fed

The U.S. Federal Open Market Committee will hold its policy
meeting tomorrow and the day after, with Fed Chairman Ben S. Bernanke explaining his stance after the decision on June 19. At
stake is the Fed’s monthly purchase of $85 billion of Treasuries
and mortgage securities and the target rate for overnight
lending between banks, which has been kept at almost zero since
December 2008.

The International Monetary Fund, which in March said the
SNB could use negative rates if the franc faces another bout of
appreciation pressure, said on May 21 that such a tool could
help cool the real-estate market. For that to happen, banks
would have to pass on the cost to clients in the form of higher
mortgage rates rather than on to depositors, it said.

That’s in contrast to the Organization for Economic
Cooperation and Development, which said last month that the SNB
may have to raise rates to help control the country’s booming
property market.

‘Side Effects’

In Denmark, sluggish economic growth has depressed loan
demand, preventing banks from charging more to make up the costs
of the negative rates. Businesses taking up loans of 7.5 million
kroner or more paid on average 1.58 percent in interest in
April, the lowest rate since at least 2007, the country’s
central bank said May 30.

Credit Suisse Group AG economist Maxime Botteron said it is
hard to predict how Swiss banks might react. “How it would feed
through the system isn’t clear at all, so I think the SNB will
be careful,” he said.

While threatening to resort to more aggressive measures,
SNB President Jordan has voiced qualms as to their introduction,
warning last month of “side effects.”

Still, UniCredit’s Koch said negative rates could work if
used in moderation, even while he doesn’t see the SNB taking
such a step at this week’s meeting.

On ‘Radar’

“A small negative interest rate would likely help to damp
safe-haven flows as observed in Denmark,” he said. “But it
would not be enough to have an impact on housing market dynamics
in a significant way.”

Denmark’s experience has shown that a negative rate shrinks
banks’ net interest income. The Danish central bank has sought
to cushion the blow as the country’s lenders struggle to recover
from a burst property bubble in its fifth year. The bank raised
the amount lenders can hold in overnight accounts, which have a
rate of zero.

The SNB doesn’t have that option as banks only have sight
deposits with the SNB, meaning they can make withdrawals any
time. There is no counterpart to Denmark’s weekly deposits.

“Negative rates are on the radar screen, but aren’t an
option for June,” ZKB’s Marmet said.